What Hungary's Foreign FX-Denominated Household Balance Sheet Can Teach The Rest Of The World

Goldman Sachs has put together a very informative chart, as part of its European chart of the day series, which shows the discrepancy between household accumulation in domestic and foreign denominated debt. While HUF-denominated debt is a mere 12% of GDP, FX-denominated is at almost 50% of GDP. Most of this debt is CHF-based, and with the CHF hitting fresh record highs, the pain for debtors is becoming unsustainable due to the relative FX strength. And while, as Goldman points out, new FX debt accumulation has plunged, the legacy positions will be there for a long time. For this debt to clear out, the Balance of Payments for Hungary and other non-euro countries will enforce a very prudent deleveraging regime, and will require that the economies grow, not contract. The last is something that is very much in question for Hungary, which as we pointed out recently, has decided to go it alone with IMF assistance, and thus without a safety net backstop should things not work out as expected. Either way, the bottom line is that as European countries loaded up on EUR-, and especially CHF-, denominated debt when the currencies were cheap, the current violent swings with a rising bias, will make the pain for the peripheral countries all that much more pronounced.

Here is some further clarification from Goldman:

The crisis has highlighted the dangers of the private sector accumulating substantial foreign debt.  Central Europe, in particular Hungary, suffers from a no less dangerous variation of this problem - namely households borrowing (from domestic banks) in foreign currency, mostly Swiss Frank and the Euro.  After the crisis hit Hungary in the autumn of 2008, the National Bank and MPC started an educational campaign to highlight the dangers of this practice to households, and FX lending regulations were tightened. As a result, new lending in foreign currencies almost ceased, however, households continued to pay the instalments on their FX mortgages, car, and consumer loans - which were now higher in domestic currency terms after the Forint weakened in late 2008 and early 2009. But the problem persists in stock terms.

Today, the MPC meets for the first time since the Hungarian President signed a law to ban FX mortgages altogether. We’ll be listening to the press conference for possible comments on the problem, including recent FX moves and the government’s reluctance to address its part of the imbalance.

Today’s European Chart of the Day illustrates how debt repayments and the debt stock have evolved since late-2008. After a long period of rapid growth, the start of 2009 brought a dramatic turnaround in accumulation of new FX debt. In net terms, and corrected for exchange rate changes, households have been repaying their FX debt at an increasing pace, with 2010Q2 marking the highest net repayment of about 0.7% GDP. However, with the Forint weakening against the Euro and the Swiss Franc (the latter being reinforced by the flight away from the Euro) household FX debt rose back to 40% of GDP, the same as in the beginning of 2009.

This underscores the vulnerable balance sheet position of Hungary (and other countries where household FX debt increased considerably), and the extent of the large balance of payments adjustment needed to reduce FX exposure. While capital continues to flow out through the banking channel, these countries will have to generate sustained trade balances and reduce public sector borrowing needs to allow for an orderly deleveraging process in the household balance sheets. This will be a long and complicated process.

Comments

[traderjoe]

It just seems so obvious - there is no way everyone around the world can service their debt. All it will take will be a couple of defaults to get the ball rolling. 

Iceland, Dubai, Illinois, etc...

[RockyRacoon]

Where did Archduke Ferdinand live?  Austria. 

His ghost is still out there!

The primary source of Franz Ferdinand's unpopularity however related to the policies he intended to apply once he assumed the throne.  He proposed to replace Austro-Hungarian dualism with 'Trialism,' a triple monarchy in which the empire's Slavs would have an equal voice in government with the Germans and Magyars.

[Strongbad]

Another reason why the gold is a better money - international debts and payments are predictable.

[trav7777]

CHF busted out Hungary.

This is the inflation/deflation that Jefferson was talking about.  Switzerland gonna own Hungary on paper.

[deadparrot]

Hopefully they can carry Hungary at cost on the BS and not have to mark to market.

[mephisto]

Without an IMF package of loans its clear the leaders of Hungary have only one plan, and its a good one. Hungary will socialise the losses, then default. IMO reading "this time is different" leads to no other possible conclusion. Hungarian sovereign CDS are somewhere around 350bps I believe, havent checked in a while. There's a trade there...

Honestly, what are the swiss going to do - invade?

[MrTrader]

I smell CHF strength will morph into CHF weakness...yet, NPL´s at Swiss banks seem under control.

[mephisto]

Eventually, yes. Their entire economy is finance and chocolate, and both will melt.

[idle muesli]

A lot -if not the majority - of the CHF lending was by Austrian banks.

[Tense INDIAN]

Have u seen ur new AMEROS that r coming

AMERO COMETH......Pretty images of the new currencies AMERO....i didnt know they had done an interview in CNBC regarding the AMERO....::

http://pakalert.wordpress.com/2010/01/25/death-of-us-dollar-secret-image...

[RockyRacoon]

Nah, here is the new money:

http://latimesblogs.latimes.com/.a/6a00d8341c630a53ef011570e77d8a970c-800wi

[rhyzimmer02]

Hungary's banks are not Swiss, they are mostly subs of EU lenders

_{Hungary's biggest bank with roughly a quarter of the market is domestically owned OTP.}

_{The next six banks in the pecking order are units of KBC, Erste Group Bank, Intesa Sanpaolo, Raiffeisen International, BayernLB and UniCredit.}

[Printfaster]

What the real message is:  European banks do not trust Euro denominated date.  They all want Swissies.

Just how long will the Euro last with such a strong vote of confidence by its banks?

This episode also points out that the real interest rate is what someone will charge to lend in the local currency.  Apparently that interest rate was too high for the previous Hungarian government.

[A Man without Q...]

The main lesson from Hungary is the danger of bankers selling products to unsophisticated investors.  Borrowers took CHF because the interest rates were so much lower, thus allowing greater leverage and therefore adding fuel to the property bubble fire.  They will not socialize the losses, and given the fact that most lenders are foreign institutions, the most likely outcome is the courts will rule that individual borrowers were not properly informed of the risks.  Either way, the lenders will not get their money back, though may end up owning the properties, if that interests them.

The IMF is going to continue holding Hungary's feet to the fire and pressure the government to take responsibility for this mess, but frankly, why the fuck should they?

[torrente]

Most of the loans are 10+yrs mortgages and 3+yrs auto loans that the banks "very wisely" financed with short term money and sucked big time in the 08-09 liquidity situation. Of course the premium is now charged on the borrowers and increasing their debt burden which is very unfair in my opinion.

[Herry12]

Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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